Massachusetts has a unique provision in its paid family and medical leave law for what it dubs a “covered business entity.” Specifically, a covered business entity is “a business or trade that contracts with self-employed individuals for services and is required to report the payment for services to such individuals on IRS Form 1099–MISC for more than 50 per cent of its workforce.”A self-employed person who works for a covered business entity and receives income that must be reported on a 1099-MISC form is called a “covered contract worker.”
Unlike other self-employed people, who must opt in to the paid family and medical leave program, covered contract workers are automatically enrolled. This means, among other things, that covered business entities must remit contributions to the fund for all of their covered contract workers at the same rates as for employees. Businesses can withhold the same proportion of the required contribution from the covered contract workers’ income as from employees’ wages. On paper, then, the covered business entity provision effectively treats certain workers receiving 1099s—covered contract workers—as if they are employees solely for the purpose of the paid leave program, without otherwise reclassifying them.
In theory, this would automatically cover many purportedly self-employed workers, including many who likely have been misclassified. In practice, however, it is nearly impossible for a business to be deemed a covered business entity. In 2020, after the Massachusetts law was passed but before benefits began, the IRS changed its form structure, such that “nonemployee compensation” previously reported on a 1099-MISC is now reported on a 1099-NEC. Because the 1099-MISC no longer covers payment for services, there are essentially no workers for whom a business “is required to report the payment for services to such individuals on IRS Form 1099–MISC,” the key defining feature of a potential covered contract worker. Legislation is currently pending to remove all references to specific tax forms in this provision. If passed, this legislation could also extend covered contract worker status and therefore paid leave to workers paid through a 1099-K form—such as, for example, ride-share drivers. Paradoxically, regulations also require that a covered contract worker both be subject to reporting under a 1099-MISC and not be an independent contractor under Massachusetts law.
Therefore, while the covered business entity provision was intended to entitle at least some workers treated as self-employed to automatic coverage, it currently does not do so in practice.
In 2023, Washington passed a new law, H.B. 1570, that created a pilot program to facilitate the entry of ride-share drivers, such as those for Uber or Lyft, into the state’s existing paid leave system. The pilot program is scheduled to start on July 1, 2024, and run through December 31, 2028.The law provides that drivers can opt in to the paid leave program for purposes of their earnings from driving “as self-employed individuals.” This provision uses an existing state law definition of “driver” that specifies that, except as otherwise required by law, a driver whose relationship with the ride-share company meets certain requirements is not considered an employee of that company. Under H.B. 1570, drivers’ rights are not tied to employee or contractor status but are instead inherent to being a ride-share driver.
H.B. 1570 provides that, in effect, ride-share companies must cover the full amount of premiums for drivers who opt in to coverage. For context, employees and employers in Washington each pay into the paid leave program, currently at rates of 0.58 percent and 0.22 percent of wages, respectively, on income up to $160,200 per year; employers with fewer than 50 employees are not required to pay the employer share, with the fund absorbing the difference. When a self-employed person opts in to coverage, that person must pay into the program at the same rate as employees—in current terms, 0.58 percent of income. Drivers who opt in to paid leave coverage under H.B. 1570 nominally will have pay 0.58 percent in premiums, but the ride-share company will be obligated to compensate them for that full amount—in effect, allowing drivers to be covered for free. Put another way, under H.B. 1570, drivers effectively pay nothing, while the companies pay 0.58 percent; if drivers were covered as employees, drivers would pay 0.58 percent and companies would pay 0.22 percent.
Instead of covering drivers automatically, as employees are, H.B. 1570 seeks to incentivize drivers to opt in by making it as easy and attractive as possible. This includes creating a role for “a third party acting on a driver’s behalf with regard to reporting and paying of premiums.” The intent is that the Drivers Union—an affiliate of Teamsters Local 117, which fought for H.B. 1570—will step in as this third party to facilitate enrollment.
As Drivers Union President Peter Kuel told the author in a June 16, 2023, email:
Washington’s Paid Family and Medical Leave program allows for the designation of representatives to facilitate premium payment and quarterly reporting. Drivers Union, as Washington’s largest driver led organization and state designated Drivers Resource Center, is prepared to facilitate administrative processes on behalf of drivers related to reporting, advancing premiums, and seeking reimbursement.
In particular, the expectation is that the Drivers Union will pay the premiums for opted-in drivers, then be reimbursed by the companies, meaning that the union, rather than individual drivers, will be out of pocket during any interim period.
In addition, drivers will be able to opt in solely for their ride-share income. This detail was added because, as Samantha Grad and Will Pitz, two Drivers Union officials, told the author in a May 2023 interview, opting in for all self-employment income was a barrier to opting in for some drivers due to fear of auditing or underreporting. H.B. 1570 also addresses this concern through imposing information-sharing requirements on ride-share companies and the state, which, in concert with the third-party facilitator structure, will alleviate the need for drivers to track their own income for premium purposes.
Whether workers are labeled as employees or contractors, they all need paid leave. Although the approaches of Massachusetts and Washington differ, both states have tried creative strategies to increase coverage targeted toward workers likely to be left out in practice. These efforts deserve further study, as policymakers and advocates continue their efforts to better understand and support the changing U.S. workforce.